Refinancing and Lower Property Values

Here's one of those infrequently discussed problems with refinancing: what if the value of your home goes down and you actually owe more on your mortgage than you could get if you sell it?

In some cases, if the value of your home isn't sufficient, it could mean that you can't refinance, even if you want to. It could theoretically mean that your lender "calls in"your mortgage -- although that is less likely if you are a good client with a good credit history. (I know: this happened to me once. The value of my property fell over 15%, and my downpayment had been only 10%. It was an uncomfortable time, but my credit was good and my bank much preferred my regular payment to foreclosing. Most banks will.)

In fact, refinancing can be dangerous to your financial health. When you refinance, you take one-time money out of your home's equity. That money will have to be paid back. It will either be paid back by you in payments made against your mortgage, or it will be paid back when your home is sold. It's that simple.

What if you can't sell your home for the value that you expect? If you go ahead with the sale, you will be left with a debt to the bank -- but no home. In effect, you'll trade your mortgage for a loan.

This is why refinancing should be done with very careful consideration. While rumors of the housing bubble may be greatly exaggerated, it is still true that prices are softening in many markets. Refinancing can be a very smart move for people who are being crushed by high-interest debt, but it doesn't get rid of your debt -- it just moves it to another loan vehicle at a lower interest rate.

So think carefully before being seduced into refinancing. It's still generally better to save for that renovation or vacation or other new purchase, rather than taking out more debt.